Why simple options trading strategies are better than complex ones?

When it comes to options trading, KISS or Keep It Simple, Silly! is the mantra for success. Simple options trading strategies are more profitable in the short, medium or long run! Time and again, I have seen it with myself and fellow professional options traders.

You are more likely to make steady and sustainable profits by executing the humble Covered Call, month after month as compared to going for fancy, multi-legged trades involving various combinations of options.

Executing simple options strategies has many benefits.

Higher Profit

This is may not be visible immediately when you draw the payoff profile of the options trading strategy. But when you combine the maximum and minimum payoffs with the probability of success of a trade, you will see that simple trades are definitely more profitable in the long run. You can use the Ultimate Options Visualizer to draw payoff profiles and calculate the profit and loss of your positions.

Low Involvement

When you execute simple options trading strategies, you do not need to be involved in managing the trade by looking at your ticker screen every minute. You can put in the trade and go about your work. If you do not have any other work, spend time with family, travel, read or just about do anything!

Easy to Initiate and Unwind

Simple options trading strategies tend to be easy to initiate and unwind as compared to the more complex strategies. You have lesser number of legs to buy and sell when getting in or getting out of the trade.

Easy to Manage

In case if the market goes against your position, it is easier and faster to manage a simpler strategy. You will have to execute one or two trades to offset a simple options trading strategy as compared to the multiple trades that you will need to execute to manage a complicated strategy.

Lower Brokerage

If your trade requires less frequent buying and selling, your brokerage costs will be lesser. Frequent buying and selling can hit you with a brokerage bill that can eat into your profits rather quickly. Simple options trading strategies tend to require lesser number of trades and hence have lesser brokerage costs associated with them.

Why do traders devise or execute “complicated strategies”?

If simple options trading strategies are more profitable and also have so many other advantages over more complicated trades, why do traders devise or execute “complicated strategies”? The answer to this question lies in understanding the mind-set of the trader behind trades.

I have invariably seen that it is more likely to see a professional hedge fund manager talk about complicated trading strategies. These are the people who manage anything from hundreds of thousands of dollars to hundreds of millions of dollars (at times, even more) of their clients’ money. They are highly educated and very highly paid employees of small or big hedge funds.

The very reason that they are highly paid maybe behind them talking about and taking complicated options positions. Somewhere, it has got to do something with them justifying their high salaries and bonuses.

This can be equated to the behavior of top football goalkeepers. In a study done on elite soccer goalkeepers by a team of Israeli scientists, the scientists analyzed 286 penalty kicks and found that 94 percent of the time the goalies dived to the right or the left – even though the chances of stopping the ball were highest when the goalkeeper stayed in the center. Why do goalkeepers almost always dive off to one side if the chances of a save are the highest if they stay at the center? Because, the goalkeepers are afraid of looking as if they’re doing nothing – and then missing the ball. Diving to one side, even if it decreases the chance of them catching the ball, makes them appear decisive.

The same, probably, holds true for highly paid hedge fund managers, vending complicated options trading strategies. They need to appear more knowledgeable than the humble government employee who trades options on the side for an additional income.

Generating Regular Profit with Simple Options Trading Strategies

The key to succeed in options trading is to generate regular profits trading options, the keyword being regular. In my experience, the most profitable options trading strategies for generating regular income are the ones that use time decay of options. Your profit in the created position increases with every passing day just because options lose their value with passage of time, everything else remaining the same.

A corollary to this is options trading does not require your full time involvement. Indeed, I have seen that I am more profitable when I am not looking at my position every few minutes or hours. But what options trading most definitely requires is the ability to control your emotions.

If you start generating steady monthly returns using simple options trading strategies and give the power of compounding, the time it needs, you will have a gigantic investment corpus.

In my various avatars, I am an Options Trader, an Author and a Coach. I use Options Trading to create a source of passive income for my family and myself. I am also using the cash flow from Options Trading to create a long term portfolio of stocks. You can easily learn and replicate my methods, just go ahead and explore my blog.